What is GDP?

This week on Facebook: I have remarked in my posts rather a lot on Global Inequality, that while there is a lot of media coverage given over to global inequality there is little indication that it has prompted any mass national desire for global equality. The populations of developed nations may well be aware of just how much they share with the other populations in the developed and developing word (at least in terms of a notional national wealth). My post on Global Inequality asks the question, “Just how equal do we want the world to be?” The answers would suggest that the wrong question is being asked and that — perhaps — those with a large measure of a quality of life should be asked, “What are they prepared to give up?”.

I also remarked in my post Henry George & Global Inequality that the trending election of politicians on a ‘populist agenda’ would seem contrary to such views. It may be that voters in an already developed country are more concerned with their own perceived inequality rather than those of anyglobal inequalities.

Last year in Social Transformation, I wrote that the driving force for the implementation of any social responsibility is — inevitably — political, which interprets its meaning to serve a political policy. These are in turn driven by fiscal policy desires for short term economic growth, regardless of the national or global consequences that it creates or its influence on the ethics that a society purports to hold.

In Other People’s Money (posted in 2012) I wrote that it was perhaps not only belated but somewhat Quixotic to rail against economists, politicians and governments, who brought about this contagion and are now shamelessly promoting their national snake oils. There is no doubt that the western industrialised nations will survive. The only questions is, In what form? A compassion fatigue point seems to have been reached in this crises. The fiscal ineptitude and political self interest that drives successive public administrations, has turned compassionate perceptions of benefaction into frugal perceptions of munificence amongst those forced to contribute to the tax revenue input stream.

There is no virtue in compulsory government charity, and there is no virtue in advocating it. A politician who portrays himself as ‘caring’ and ‘sensitive’ because he wants to expand the government’s charitable programs is merely saying that he’s willing to try to do good with other people’s money. P J O’Rourke

When the Gross Domestic Product (GDP) is a factor of economic growth and the predicted political forecasts rely on deficit financing, with the consequential programme of austerity, it’s little wonder that compassion fatigue sets in. The assumptions made that growth in GDP leads to equality and (perhaps) a compassionate global benefaction is not borne out by the evidence. Measuring GDP has consistently failed as a measure of economic growth that is sustainable¹.

1. Is GDP the best measure of growth? There is almost universal agreement that GDP alone is an imperfect metric for growth and prosperity. So we did not take lightly our decision to define growth using GDP in our new report, Global Growth: Can productivity save the day in an aging world? But limitations on data across a large number of countries and a long historical time frame meant GDP was the metric that made sense. As the Financial Times put it, “GDP may be anachronistic and misleading. It may fail entirely to capture the complex trade-offs between present and future, work and leisure, ‘good’ growth and ‘bad’ growth. Its great virtue, however, remains that it is a single, concrete number. For the time being, we may be stuck with it.”

2. 5 ways GDP gets it totally wrong as a measure of our success: GDP (Gross Domestic Product) is how we rank countries and judge their performance. It is the denominator of choice. It determines how much a country can borrow and at what rate. But GDP is well past its sell-by date, as people are starting to realise. However brilliant the concept, a measure that was invented in the manufacturing age as a means of fighting the Depression is becoming less and less capable of imparting sensible signals about complex modern economies.

3. Why GDP Is a Terrible Metric for Success and Wealth: The problems with using GDP as a barometer go beyond masking inequality. Invented in the U.S. in the 1930s, the figure is a child of the manufacturing age–good at measuring physical production but not the services that dominate modern economies. How would GDP measure the quality of mental-health care or the availability of day-care centers and parks in your area?

4. Why We Should Ignore GDP Growth: It is entirely possible, indeed it is likely in some places, for per-capita GDP to rise sharply while most of the population sees no change in its living standards or economic health. An adjustment to compensate for this inequity is an excellent idea. That point brings up a thornier problem, though. In whatever way we measure it, is “growth” the right thing to watch? Does it really tell us what we think it does? We look at GDP growth and assume a country that has it is prospering. We think everyone who lives there must be thrilled. Often, they have little reason to be.

5. GDP as a measure of economic well-being: In a new working paper, Karen Dynan of Harvard University and the Peterson Institute for International Economics and the Hutchins Center’s Louise Sheiner conclude that changes in real Gross Domestic Product (GDP) do a reasonable job in capturing changes in a nation’s economic well-being with one important exception. They argue that the exclusion of non-market activities that increase economic well-being merits more attention, particularly given the growing importance of such activities.

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¹Report by the Commission on the Measurement of Economic Performance and Social Progress (pdf):The standard measures may suggest, for instance that there is less inflation or more growth than individuals perceive to be the case, and the gap is so large and so universal that it cannot be explained by reference to money illusion or to human psychology. In some countries, this gap has undermined confidence in official statistics (for example, in France and in the United Kingdom. Only one third of citizens trust official figures, and these countries are not exceptions), with a clear impact on the way in which public discourse about the conditions of the economy and necessary policies takes place.